For financial advisers and professional investors only – not for distribution to retail investors.
19 July 2023
This insight has been produced by Winton.
The Winton Global Alpha Fund is proudly brought to you by Macquarie Professional Series.
Every adviser understands the importance of constructing diversified investment portfolios, yet very few genuinely diversifying investments are available to most Australian investors. Winton’s Peter Ewing highlights the difficulties “diversified” portfolios faced in 2022, before introducing an alternative to stocks and bonds that is widely available to Australian investors.
2022: When conventional investment wisdom broke
Constructing diversified investment portfolios has been straightforward for most of the past 20 years. Stocks have generally moved in the opposite direction to bonds, which meant that the two asset classes were diversifying for one another. For instance, during the Dotcom Bubble burst of the early 2000s, the 2008 Global Financial Crisis and the 2020 Covid outbreak, bond prices surged to mitigate investors’ losses in stocks.
This inverse relationship between the returns of stocks and bonds − combined with the rise of passive index-tracking investment products – meant that, until 2022, advisers could construct low-cost portfolios with attractive return characteristics by simply combining these two asset classes. Portfolios could then be tailored to an individual investor’s risk tolerance and investment horizon, by adjusting the ratio of “risky” stocks to “safe” bonds.
This approach to portfolio construction worked extraordinarily well in the years following the 2008 Global Financial Crisis. That is until 2022, when global inflation soared and stocks and bonds fell together. What made matters worse for Australian-based investors is that interest rates rose and “safe” bonds lost more than “risky” stocks.
Risk ratings reversed: passive stock-bond portfolios in 2022
Past performance is not a reliable indicator of future performance. Source: Bloomberg, S&P Global, Winton, as at 31 December 2022. Stocks: ASX 200 Net Total Return Index; Bonds: S&P/ASX Australian Government Bond Index. Portfolio weights are set as at the start of the year and not rebalanced.
The return of stocks and bonds moving in lockstep – or exhibiting “positive correlation” – will not have surprised those with a longer-term perspective. If we look back to 1975, we can see that prior to 2000, positive correlation between equities and bonds was the norm: investors would have expected their stock and bond investments to rise and fall together.
The longer view: positive stock-bond correlation the norm prior to 2000
Past performance is not a reliable indicator of future performance. Source: Bloomberg, Winton, as at 31 December 2022. Equities: S&P 500; Bonds: US 10-year treasury note.
Trend following: a genuine alternative
Private markets have dominated recent conversations concerning alternative investments, yet the liquidity profile of this style of investment strategy may not be suitable for all investors. Trend following, on the other hand, offers a source of diversifying returns by trading instruments that are highly liquid.
Many of the world’s largest institutional investors maintain an allocation to trend following, which seeks to profit from major price trends across commodities, currencies, stock indices and fixed income. Part of the reason for this strategy’s success is that it has a long history of generating diversifying returns, particularly in difficult environments for traditional investment portfolios – such as periods of high inflation and equity bear markets.
Trend following’s attractive properties were on show in 2022: the SG Trend Index, which tracks the performance of the 10 largest strategies, rose 27.3% over the course of the year. And in 2023, as at 30 June, some of the best-performing strategies – including the Winton Global Alpha Fund – are outperforming the S&P/ASX 200 Index.
Important information: The Target Market Determination (TMD), available at macquarie.com/mam/tmd, includes a description of the class of consumers for whom the Fund is likely to be consistent with their objectives, financial situation and needs.
The Fund(s) mentioned above may have multiple classes of units on issue. A separate class of units is not a separate managed investment scheme.
This information has been prepared by Macquarie Investment Management Australia Limited (ABN 55 092 552 611 AFSL 238321) the issuer and responsible entity of the Fund(s) referred to above. This is general information only and does not take account of investment objectives, financial situation or needs of any person and before acting on this information, you should consider whether this information is appropriate for you. In deciding whether to acquire or continue to hold an investment in a Fund, an investor should consider the product disclosure statement for the relevant class of units in a Fund, if any, and the Website Disclosure Information available at macquarie.com/mam or by contacting us on 1800 814 523.
Nothing in this document constitutes a recommendation to buy, sell or hold any financial product, security or instrument.
Future results are impossible to predict. This document contains opinions, conclusions, estimates and other forward-looking statements which are, by their very nature, subject to various risks and uncertainties. Actual events or results may differ materially, positively or negatively, from those reflected or contemplated in such forward-looking statements.
Past performance information shown herein, is not a reliable indicator of future performance. No representation or warranty, express or implied, is made as to the suitability, accuracy, currency or completeness of the information, opinions and conclusions contained in this document. In preparing this document, reliance has been placed, without independent verification, on the accuracy and completeness of information available from external sources. To the maximum extent permitted by law, no member of the Macquarie Group nor its directors, employees or agents accept any liability for any loss arising from the use of this document, its contents or otherwise arising in connection with it.